SIE (Securities Industry Essentials) Practice Exam

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Which of the following constitutes a violation of Reg. T?

Purchasing and then selling securities before paying for the purchase
Borrowing funds to pay for securities
Using unsettled funds to make another purchase
Transferring funds between accounts to cover purchases

The correct answer is: Purchasing and then selling securities before paying for the purchase

A violation of Reg. T would involve using unsettled funds to make another purchase (C) rather than waiting for the funds to settle. Buying and then selling securities before paying for the purchase (A) is known as "free-riding" and is also a violation of Reg. T. Borrowing funds to pay for securities (B) is generally allowed under Reg. T as long as the borrowing is authorized by the brokerage firm and the customer. Transferring funds between accounts to cover purchases (D) is not necessarily a violation of Reg. T, but it could be if the transfer is done to circumvent the margin rules under Reg. T. Overall, Reg. T is a Federal Reserve Board regulation that governs the extension of credit in securities transactions and aims to prevent excessive speculation and potential market manipulation.